House Amendment 1
S 298 - Session 125 (2023-2024)
Allocation and apportionment

The Committee on Ways and Means proposes the following amendment (LC-298.DG0002H):

Amend the bill, as and if amended, SECTION 1, by striking Section 12-6-2320(B)(1), (2), (3), (4), and (5) and inserting:

 (B)(1) Notice. When the department has reason to believe that any taxpayer conducts its trade or business in a manner as to fail to fairly represent the extent of the taxpayer's business activity in this State through the use of transactions that lack economic substance or are not at fair market value between members of an affiliated group of entities, the department may, upon written notice to the taxpayer, require any information reasonably necessary to determine whether the taxpayer's intercompany transactions have economic substance and are at fair market value and for the accurate computation of the taxpayer's state net income properly attributable to its business activity in this State. The taxpayer must provide the information requested within ninety days of the date of the notice.
  (2) Adjust Net Income. If upon review of the information provided, the department finds that the taxpayer's intercompany transactions lack economic substance or are not at fair market value, the department may redetermine the state net income of the taxpayer properly attributable to its business activity in this State under subsection (A) by: (i) adding back, eliminating, or otherwise adjusting intercompany transactions to accurately compute the taxpayer's state net income , or, if such adjustments are not adequate under the circumstances to redetermine state net income, (ii) requiring the taxpayer to file a return that reflects the net income on a combined basis of all members of its affiliated group that are conducting a unitary business. The department shall consider and be authorized to use any reasonable method proposed by the taxpayer for redetermining its state net income attributable to its business activity in this State. In determining whether the taxpayer's intercompany transactions lack economic substance or are not at fair market value, the department shall consider each taxable year separately.
  (3) Voluntary Redetermination. In addition to the authority granted under this subsection, if the department has reason to believe that any taxpayer's state net income properly attributable to its business activity in this State is not fairly represented on a separate return required by this subsection because of intercompany transactions, without making a finding that those transactions lack economic substance or are not at fair market value, the department and the taxpayer jointly may determine and agree to an alternative filing methodology that fairly represents state net income.
  (4) Combined Return. If the department finds that a combined return is required under the provisions of subsection (A) and this subsection, the department may, upon written notice to the taxpayer, require the taxpayer to submit the combined return, and the taxpayer shall submit the combined return within ninety days of the date of the notice. The submission by the taxpayer of the combined return required by the department must not be deemed to be a return or construed as an agreement by the taxpayer that an assessment based on the combined return is correct or that additional tax is due by the department's deadline for submitting the combined return. The department or the taxpayer may propose a combination of fewer than all members of the unitary group, and the department is authorized to consider whether such proposed combination is a reasonable means of redetermining state net income; provided, however, the department shall not require a combination of fewer than all members of the unitary group without the consent of the taxpayer.
  (5) Written Statement of Findings. If the department makes an adjustment or requires a combined return under this section, the department shall provide the taxpayer with a written statement containing details of the facts, circumstances, and reasons for which the department has found that the taxpayer did not fairly represent its state net income properly attributable to its business activity in this State and the department's proposed method for computation of the taxpayer's state net income no later than ninety days following the issuance of a proposed assessment as provided in this section.

Amend the bill further, SECTION 1, by striking Section 12-6-2320(B)(9), (10), (11), (12), and (13) and inserting:

  (9) Apportionment. If the department requires a combined return under this section, the combined state net income of the taxpayer and the members of the affiliated group of entities must be apportioned to this State by use of an apportionment formula that fairly represents the extent of taxpayer's business activity in this State and which fairly reflects the apportionment formula in Section 12-6-2295 applicable to the taxpayer and each member of the affiliated group included in the combined return.
  (10) Affiliated Group Defined. For purposes of this section, an affiliated group is a group of two or more corporations or noncorporate entities in which more than fifty percent of the voting stock of each member corporation or ownership interest of each member noncorporate entity is directly or indirectly owned or controlled by a common owner or owners, either corporate or noncorporate, or by one or more of the member corporations or noncorporate entities. Nothing in this subsection may be construed to limit or negate the department's authority to add back, eliminate, or otherwise adjust intercompany transactions involving the listed entities to accurately compute the taxpayer's state net income properly attributable to its business activity in this State, as provided in this subsection.
 The following entities must not be included in a combined return:
   (a) a taxpayer not required to file a federal income tax return;
   (b) an insurance company, other than a captive insurance company: (i) which is subject to tax under Title 38; (ii) whose premiums are subject to tax under Chapter 7, Title 38 or a similar tax in another state; (iii) which is licensed as a reinsurance company; (iv) which is a life insurance company as defined in Section 816 of the Internal Revenue Code; or (v) which is an insurance company subject to tax imposed by Section 831 of the Internal Revenue Code. A "captive insurance company" means an insurer that is part of an affiliated group where the insurer receives more than fifty percent of its net written premiums or other amounts received as compensation for insurance from members of the affiliated group;
   (c) a taxpayer exempt from taxation under Section 501 of the Internal Revenue Code;
   
   (d) a foreign taxpayer as defined in Section 7701 of the Internal Revenue Code, other than a domestic branch thereof;
   
   (e) a taxpayer with at least eighty percent of its gross income from all sources in the tax year being active foreign business income as defined in Section 861(c)(1)(B) of the Internal Revenue Code in effect as of July 1, 2021;
   (f) any other entity not subject to tax under Section 12-6-530.
  (11) Proposed Assessment or Refund. If the department redetermines the state net income of the taxpayer in accordance with this section by adjusting the state net income of the taxpayer or requiring a combined return, the department shall issue a proposed assessment or refund upon making the redetermination. When a refund is determined in whole or part by a proposed assessment to an affiliated group member under this section, the refund may not be issued until the proposed assessment to the affiliated group member has become collectable. The amount of the refund shall reflect any changes made by the department under this section. Otherwise, the procedures for a proposed assessment or a refund in Chapter 60 are applicable to proposed assessments and refunds made under this section.
  (12) Penalties. If a combined return required by this section is not timely submitted by a taxpayer, then the taxpayer is subject to the penalties provided in Section 12-60-430. Penalties may not be imposed on an assessment under this section except as expressly authorized in this section.
  (13) Advice. A taxpayer may request in writing from the department specific advice regarding whether a redetermination of the taxpayer's state net income or a combined return would be required under this section under certain facts and circumstances. The department may request information from the taxpayer that is required to provide the specific advice. The department shall provide the specific advice within one hundred twenty days of the receipt of the requested information from the taxpayer. The department's advice under this item is not a department determination under the Revenue Procedures Act.

Amend the bill further, SECTION 1, by striking Section 12-6-2320(B)(16) and inserting:

  (16) Appeals. If the taxpayer appeals a final determination by the department under this section to the Administrative Law Court in a contested tax case, the administrative law judge shall review de novo: (i) whether the separate income tax returns submitted by the taxpayer fail to fairly represent the extent of the taxpayer's business activity in this State through the use of intercompany transactions that lack economic substance or are not at fair market value between members of an affiliated group of entities; (ii) whether the department's means of determining the taxpayer's state net income under this section is an appropriate means of determining the taxpayer's state net income properly attributable to this State; and (iii) if a combined return is required by the department, whether adjustments other than requiring the taxpayer to file a return on a combined basis are adequate under the circumstances to redetermine state net income.

Amend the bill further, by striking SECTION 2 and inserting:

SECTION 2. This act takes effect upon approval by the Governor and does not apply to any assessments under judicial review by the South Carolina Administrative Law Court, Court of Appeals, or Supreme Court as of the date of the Governor's approval.